On January 9, we reviewed trading volume in credit default swaps for 1,090 reference names reported by the Depository Trust & Clearing Corporation and found that only one reference name in the world had averaged more than 10 non-dealer trades per day in the 77 weeks ended on December 30, 2011. In today’s blog, the fifth in the CDS trading volume series, we look at weekly credit default swap trading volume for sovereigns among those 1,090 reference names. We find that, in a small subset of sovereign names, there is regular trading, but in modest volume.
The first four blogs in our series on trading volume in the credit default swap market focused on the share of dealer-dealer trading, trading volume in all 1,090 reference names reported by DTCC, trading volume and its implications among U.S. banking companies, and trading volume in municipal and sub-sovereign entities:
van Deventer, Donald R. “Collusion and CDS Dealer Volume,” Kamakura blog, www.kamakuraco.com, January 4, 2012.
van Deventer, Donald R. “CDS Trading Volume for 1,090 Reference Names,” Kamakura blog, www.kamakuraco.com, January 9, 2012.
van Deventer, Donald R. “Credit Default Swaps and Deposit Insurance,” Kamakura blog, www.kamakuraco.com, January 10, 2012.
van Deventer, Donald R. “Municipal Credit Default Swap Trading Volume,” Kamakura blog, www.kamakuraco.com, January 11, 2012.
In this blog, we analyze credit default swap trading volume for the sovereign reference names among the 1,090 reference names for which CDS trades were reported by DTCC during the 77 week period ending December 30, 2011. The weekly trade information is from the Section IV reports from DTCC. The data is described this way in the DTCC document “Explanation of Trade Information Warehouse Data” (May, 2011):
“Section IV (Weekly Transaction Activity) provides weekly activity where market participants were engaging in market risk transfer activity. The transaction types include new trades between two parties, a termination of an existing transaction, or the assignment of an existing transaction to a third party. Section IV excludes transactions which did not result in a change in the market risk position of the market participants, and are not market activity. For example, central counterparty clearing, and portfolio compression both terminate existing transactions and re-book new transactions or amend existing transactions. These transactions still maintain the same risk profile and consequently are not included as ‘market risk transfer activity.’”
As discussed in the January 9 blog, our emphasis is not on gross trading volume. As our January 4, 2012 blog showed, dealer-dealer volume is 81.68% in the single name credit default swap market and it would be nearly costless for dealers to inflate gross trading volume by trading among themselves. Instead, we focus on “end user” trading where at least one of the parties to a trade is not a dealer. Accordingly, we make the following adjustments to the weekly number of trades reported by DTCC for each sovereign reference name:
- We divide each weekly number of trades by 5 to convert weekly trading volume to an average daily volume for that week.
- From that gross daily average number of trades, we classify 81.68% of trades as “dealer-dealer” trades, using the average “dealer-dealer” share of trades in the DTCC trade warehouse during the 77 week period studied.
- The remaining 18.32% is classified as daily average “non-dealer” volume, the focus of the reporting below.
Daily Non-Dealer Trading Volume for Sovereign Reference Names
Of the 1,090 reference names for which DTCC reported credit default swap trades in the 77 week period, only 57 were sovereigns:
ABU DHABI
ARAB REPUBLIC OF EGYPT
ARGENTINE REPUBLIC
BOLIVARIAN REPUBLIC OF VENEZUELA
COMMONWEALTH OF AUSTRALIA
CZECH REPUBLIC
DUBAI
FEDERAL REPUBLIC OF GERMANY
FEDERATIVE REPUBLIC OF BRAZIL
FRENCH REPUBLIC
HELLENIC REPUBLIC
IRELAND
JAPAN
KINGDOM OF BELGIUM
KINGDOM OF DENMARK
KINGDOM OF NORWAY
KINGDOM OF SAUDI ARABIA
KINGDOM OF SPAIN
KINGDOM OF SWEDEN
KINGDOM OF THAILAND
KINGDOM OF THE NETHERLANDS
LEBANESE REPUBLIC
MALAYSIA
NEW ZEALAND
PEOPLE’S REPUBLIC OF CHINA
PORTUGUESE REPUBLIC
REPUBLIC OF AUSTRIA
REPUBLIC OF BULGARIA
REPUBLIC OF CHILE
REPUBLIC OF COLOMBIA
REPUBLIC OF CROATIA
REPUBLIC OF ESTONIA
REPUBLIC OF FINLAND
REPUBLIC OF HUNGARY
REPUBLIC OF ICELAND
REPUBLIC OF INDONESIA
REPUBLIC OF ITALY
REPUBLIC OF KAZAKHSTAN
REPUBLIC OF KOREA
REPUBLIC OF LATVIA
REPUBLIC OF LITHUANIA
REPUBLIC OF PANAMA
REPUBLIC OF PERU
REPUBLIC OF POLAND
REPUBLIC OF SLOVENIA
REPUBLIC OF SOUTH AFRICA
REPUBLIC OF THE PHILIPPINES
REPUBLIC OF TURKEY
ROMANIA
RUSSIAN FEDERATION
SLOVAK REPUBLIC
SOCIALIST REPUBLIC OF VIETNAM
STATE OF ISRAEL
STATE OF QATAR
UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND
UNITED MEXICAN STATES
UNITED STATES OF AMERICA
No credit default swap trades were reported in the 77 weeks ending December 30, 2011 for these additional 128 sovereigns which have default probabilities in Kamakura Risk Information Services sovereign default service:
Afghanistan
Albania
Algeria
Angola
Armenia
Azerbaijan
Bahamas
Bahrain
Bangladesh
Barbados
Belarus
Belize
Benin
Bhutan
Bolivia
Bosnia and Herzegovina
Botswana
Brunei
Burkina Faso
Burundi
Cambodia
Cameroon
Canada
Cape Verde
Central African Republic
Chad
Comoros
Congo Dem. Rep.
Congo Rep.
Costa Rica
Cote d Ivoire
Cuba
Cyprus
Djibouti
Dominica
Dominican Republic
Ecuador
Equatorial Guinea
Eritrea
Ethiopia
Fiji
Gabon
Gambia
Georgia
Ghana
Grenada
Guatemala
Guinea
Guinea-Bissau
Guyana
Haiti
Honduras
Hong Kong
India
Iran
Iraq
Ivory Coast
Jamaica
Jordan
Kenya
Kuwait
Kyrgyz Republic
Lao PDR
Lesotho
Liberia
Libya
Luxembourg
Macedonia
Madagascar
Malawi
Maldives
Mali
Malta
Mauritania
Mauritius
Moldova
Mongolia
Morocco
Mozambique
Myanmar
Namibia
Nauru
Nepal
Nicaragua
Niger
Nigeria
North Korea
Oman
Pakistan
Papua New Guinea
Paraguay
Rwanda
Samoa
Sao Tome and Principe
Senegal
Serbia
Serbia and Montenegro
Seychelles
Sierra Leone
Singapore
Solomon Islands
Somalia
Sri Lanka
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
Sudan
Suriname
Swaziland
Switzerland
Syrian Arab Republic
Taiwan
Tajikistan
Tanzania
Togo
Tonga
Trinidad and Tobago
Tunisia
Turkmenistan
Uganda
Ukraine
United Arab Emirates
Uruguay
Uzbekistan
Vanuatu
Yemen
Zambia
Zimbabwe
Analysis of Daily Average Non-Dealer Trades Per Day
We first analyze the 77 week averages for the 57 sovereigns for which CDS trading volume was greater than zero during the 77 weeks ending December 31, 2011. The daily average non-dealer trading volume, calculated as described above, was distributed as follows:
The conclusions that can be drawn from this table are summarized here:
- 52.6% of the 57 sovereigns averaged less than one non-dealer CDS trade per day
- 93.0% of the 57 sovereigns averaged less than five non-dealer CDS trades per day
- The remaining 4 sovereigns had the highest levels of non-dealer CDS trades per day of the 1,090 reference names reported by DTCC, but those figures were only 11.28, 9.52, 9.32, and 6.61 trades per day. The sovereigns with the 3 highest average number of non-dealer trades per day were all members of the European Union.
- The average 77 week daily average number of non-dealer trades per day for the 57 sovereigns was 2.08 trades per day
- The median 77 week daily average number of non-dealer trades per day was 0.92 trades per day
- The United States of America 77 week average non-dealer trades per day was approximately equal to the median (see disclosure restrictions imposed by DTCC below)
We conclude that trading volume for the most active sovereigns is higher than it is for the most active corporations, which is only logical given that such sovereigns issue more debt than the most active corporations. The correlation between trading volume and debt outstanding is weak, however, with the United States and Japan well down on the ranking of trade volume even though those two countries have the largest amount of debt outstanding.
Analyzing Trading Volume in Aggregate
We now analyze all 77 weeks of data, not just the average over that period, for all 57 sovereigns for which DTCC reported non-zero trade volume. There were 4,389 ( = 57 x 77) observations on CDS trading volume for these 57 sovereigns, and there were no trades during 265 observations, 6% of the total. The distribution of non-dealer trades per day over these 4,389 observations is summarized in the following chart:
One can draw the following conclusions over 4,389 weekly observations:
- 53.11% of the observations showed 1 non-dealer trade per day or less
- 92.5% of the observations showed 6 non-dealer trades per day or less
- 96.72% of the observations showed 10 non-dealer trades per day or less
- Only 0.32% of the observations were for more than 25 non-dealer trades per day
- The highest volume week featured 1,271 gross trades per week, 254.2 gross trades per day, and 46.6 average non-dealer trades per day.
- Just 10 sovereigns account for 52% of the total trading volume in credit default swaps over the 77 week period ending December 30, 2011.
While the sovereign CDS market shows more non-dealer CDS daily average volume than the corporate market, trading is concentrated in a relatively few names and 128 sovereigns had no CDS trades at all over the 77 week period studied.
Detailed Information on CDS Trading Volume by Individual Reference Name
The DTCC website requires those who download the data to accept the following language in the “Terms of Use Agreement”:
“You agree to treat any Report containing data on a specific entity, rather than aggregate position or transaction activity or other aggregate data, as confidential, or, if you are a regulator or governmental entity, in accordance with any statutory confidentiality requirements applicable to you.”
Put differently, the data is available for free to everyone who agrees to the Terms of Use Agreement, but Mr. A cannot give the freely available data on a reference name basis to Mr. B unless Mr. B has also agreed to the Terms of Use Agreement.
Therefore, Kamakura is pleased to provide the listing of trading volume by sovereign reference name to those who e-mail info@kamakuraco.com and certify that they have read and agreed to the following DTCC terms of use agreement:
http://www.dtcc.com/products/consent.php?id=tiwd/products/derivserv/data/index.php
We urge the DTCC to remove the restriction above from the terms of use agreement immediately.
Donald R. van Deventer
Kamakura Corporation
Honolulu, January 12, 2012